What is a Debt Security?

A debt security is any type of security that must be paid back in full to the investor, along with interest. The investor has the right to trade the security to a third party. The risk associated with a debt security is generally less than that of an equity security, since the amount on loan should eventually be paid back. Nonetheless, there is still a risk of nonpayment associated with debt securities, especially when the issuer is highly leveraged and is experiencing poor cash flows.

Examples of Debt Securities

Examples of debt securities are bonds, convertible debt, commercial paper, promissory notes, and redeemable preferred stock. In each of these cases, the lender or investor is entitled to receive the full amount of the security at some later date, or to sell it now on a secondary market.